Cap and Trade Tales

Cap and Trade is an attractive idea that looks like it might work until one gets into the details. It certainly was my first choice as a putative solution. It is just not that simple.

The major problem is that the energy industry does not operate a level playing field when it comes to properly monetizing its costs to society. If this were changed, the problems would likely begin to go away.

A huge part of the cost of coal based power has been the impact of the stack gas on adjacent communities. Cleaning them up is possible and costly. It is far cheaper to politically engineer you way around the problem than to actually fix it.

That is why Chinese cities presently suffer from debilitating air and it derivative health costs.

Far better than cap and trade would be a treaty that progressively begins to charge back those costs to those that fail to remedy the situation. An outright ban is impractical but leveling the playing field over twenty years allows the better solutions to be quickly implemented.

Severin Borenstein on Cap and Trade

Dr. Severin Borenstein is an outspoken economist and thought leader in carbon economics and energy matters. He serves as the Director of the University of California Energy Institute as well as in a number ofother distinguished roles.

His talk at theCalCEF Angel Fundmonthly meeting was a viewpoint on Cap and Trade policy and its impact on Green House Gases (GHGs) and the price of oil, coal, and natural gas. He summed up his speech last night with these words: "What a downer."

For a bit of background on cap and trade you can gohere. Note that there is already a market for GHG permits - The EU has been trading GHG permits for 4 years, RGGI in Eastern US is a carbon market and California has passed legislation in this regard.

But according to Borenstein, "There is a ticking time bomb under these cap and trade models. Most studies ignore the supply elasticity of fossil fuels." "Analysis to date hasn't focused on resource price change in response to cap and trade - resource scarcity and price changes are likely to be central."

Here is the argument:

Pricing GHG permits at $30 per ton does not impact coal usage."If GHG permits are at $30 to $40 per ton - will that cut down coal production or oil production? The answer is almost certainly "no"" according to Borenstein.

According to Borenstein, it may take GHG permits priced at $80-$100 per ton to drive coal out of the market.

"You have to drive coal out of the market. You have to drive the price of coal down until it isn't worth mining anymore," adding "Or you drive the price of natural gas so high that it is not competitive with other renewable sources."

Strikingly for an economist, Borenstein essentially punted on the value of Cap and Trade - he abandoned the value of cap and trade and carbon taxes and suggested that the main instrument in reducing GHGs is going to have to be technological change. He added that we probably need more money channeled to energy R&D and that we need more technological "hail mary passes."